QUESTION FOUR (4)Lexton Limited has an equity beta of 1.10. The market risk premium in Zambia is expectedCRM RAto be 5% and the yield on government bonds is currently 7.5%. Lexton has issued bondsand its K100 par value bond is currently trading at K94.50. The coupon rate is 8%. Thematurity date is five years' time and the corporation tax rate is 28%. Interest is payableannually in arrears, The company has just paid the coupon interest for the current year.REQUIRED:a) What is Lexton's cost of equity, based on the Capital Asset Pricing Model (CAPM)?(5 Marks)b) What is the after cost of debt?(5 Marks)c) Lexton paid a dividend of KO.12 per share and the dividend per share is expected togrow at 7% indefinitely. The company's share price is K2.30. What is the company'scost of equity using the dividend growth model?(8 Marks)d) What is the weighted average cost of capital (WACC) if the target debt-equity ratio is50%? (Use the cost of equity as per CAPM)(7 Marks)[TOTAL: 25 MARKS]•Ke= 0.75 +0.05 (1.10) -kd (1.-10-80599we (20) / (1-1)-0.05 (1) 164712-425Page 6 of 1514341-0-28)68.0450(149)-2.461

a) Cost of equity using CAPM: Cost of equity = Risk-free rate + (Beta × Market risk premium) Given:…

Answered: QUESTION FOUR (4) Lexton Limited has an…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Problem 3 A discount bond offering an annual coupon rate of 9%, with interest paid annually, has a face value of $1,000. The difference between its yield to maturity and the coupon rate is 4%. The bond matures in 8 years. What is the price of the bond? Problem 4 Consider the following information for the Global Investment Fund, which holds 4 stocks. The market's required rate of return is 13.25%, the risk-free rate is 7%, and the Fund's assets are as follows. What is the Fund's required rate of return? Stock A: Investment = $200,000, b = 1.5, Stock B: Investment = $300,000, b ==-0.5 Stock C: Investment = $500,000, b = 1.25, Stock D: Investment = $1,000,000, b = 0.75
Question 1 Assume the yield curve is flat at 6% pa nominal. Today’s date is 18/7/2011. Suppose we have a liability of $100,000 due in exactly 5 year’s time. We want to immunize the liability by investing in a combination of 3 year coupon-paying bonds paying 10% annual coupons and 7 year zero coupon bonds. (a) Assuming annual compounding for all bonds and that each bond has a face value of $100, show that the immunization portfolio consists of 317.62 coupon-paying bonds with three years to maturity and 594.95 zero-coupon bonds with 7 year to maturity. Note: You only have to derive a system of equations and then show that the solution given above satisfies both equations. (b) Explain carefully what further transactions are needed, if any, to ensure the liability can be met on the due date. In your answer, refer to interest rate risk, reinvestment risk and rebalancing and any other relevant concepts.
Q4
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Finance 6. Bozo finds the following information online: the 10-year US treasury note is yielding 3.8%, and the beta of the stock he is following, Clown Co. (CC) is 2.0. The required return for CC is 18%. What is the expected return of the market? If the Federal Reserve raises the 10-year notes to 4.5%, what would the new expected return be for CC?
QUESTION TWO A large Bahraini company issued BD10,000, 10%, 10-year bonds that paid interest semi- annually. You bought the bonds for BD9,000 per bond. What was your yield to maturity? (Be careful.) What is the company's after tax cost of debt if the corporate tax rate is 30%?
Please answer problem 4!! just giving you problem 3 for the info on it Problem 3 You observe that The James Company Inc. issued a $10 trillion 7 year bond 5 and a half years ago. The bond pays its 7 percent coupon semi-annually. If the current market interest rates are 5.5 percent, what will a bond from the James Company sell for in the market today? What is the current yield on this bond? Problem 4 You bought the James bond from problem 3 when the bond was first issued for a quoted price of 99.25. If you sell the bond today, what is the effective annual holding period return that you earned on your investment? Show your work and your time line.
Question 4 (i) What is the approximate annualized yield on a 6-month Treasury bill with a face value of $1000 that is sold at $970 in the primary market? (ii) A 5-year Treasury bond (TBOND1) is sold on the market one day at $1000 with an annual coupon of $60. The following day bad news hits the market and a new 5-year Treasury bond is sold on the market at an $80 annual coupon. What is the approximate new secondary market price of TBOND1? (iii) Write down an equation for the three main components of the nominal long term interest rate on a bond, clearly explaining what each symbol stands for.
Question 6 Municipal bonds were issued with a face value of $100,000 and a coupon rate of 0.15% per quarter, and coupon payments are quarterly. This bond is bought in the bond market before maturation, and there are only 14 payments remaining. The first coupon payment of this bond is due today and the next payment is due after three months (one quarter), which you will be entitled to receive if you buy this bond now. What is the maximum amount you should pay for this bond today? As an investor, you wish to earn 2.5% compounded daily. Consider first calculating the quarterly effective interest rate for this investor. The coupon rate can be used to calculate recurrent revenues from this bond which will be coupon rate times its face value. *Assume that a quarter is 90 days
Question 22: A 10-year corporate bond has coupon rate equal to 5.5%. This bond has a par value equal to 100, pays annual coupons on November 17, and matures on November 17, 2033. Because of the credit risk associated with the payments of this bond, the market is discounting its cash flows using yields that are 3 percentage points higher than the yields required from credit- risk-free government bonds. As a result, this corporate bond has a yield to maturity equal to 6.711%. A. What is the price of the 10-year corporate bond? B. Using the first-order linear approximation, what would be the percentage change in the price of this 10-year corporate bond if its yield to maturity decreases by 0.5 percentage points?
5 2 Chamberlain Company wants to issue new 18-year bonds for some much-needed expansion projects. The company currently has 9.8 percent coupon bonds on the market that sell for $865.21, make semiannual payments, and mature in 18 years. What coupon rate should the company set on its new bonds if it wants them to sell at par? Assume a par value of $1,000.

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